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Revisited: Chapter 11 bankruptcy or bailout for the automakers?

The debates between President Barack Obama and Governor Mitt Romney have touched on the auto bailout and whether there was a bankruptcy alternative. According to Romney, the government should have “Let Detroit Go Bankruptcy” (that was the title of his opinion article in The New York Times in 2008). He asked the government to put the automakers through a managed bankruptcy, rather than bailing them out.

A recent opinion piece in The New York Times discussed Romney’s view and whether what he was asking of the automakers would send them down the Chapter 7 bankruptcy path, rather than the well-advocated-for Chapter 11 business bankruptcy.

In his article, Romney said that the government should not be involved in the Chapter 11 bankruptcy except to guarantee some debtor-in-possession loans. According to the author of the recent opinion piece, however, those loans may not have been available due to the credit crisis. Without a lending option, would the automakers have been able to continue operations or would they need to liquidate through a Chapter 7 bankruptcy?

Of course, there is no way to tell now if the money would have been available at the time. In most situations involving businesses that have the capital to reorganize, a Chapter 11 bankruptcy is a very good option. Through Chapter 11, the business owners can continue to remain in possession of the business while reorganizing through a Chapter 11 reorganization plan agreed upon with creditors.

Only in rare occasions will the government determine that something is “too big to fail” and provide financial support to prevent liquidation. Yet, your company’s success is also important. If your business faces financial challenges, consider filing for Chapter 11 bankruptcy.

Source: New York Times, DealB%k, “Was there a bankruptcy alternative for the automakers?” Stephen J. Lubben, Oct. 23, 2012.

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